Who is Satoshi Nakamoto?

Satoshi Nakamoto was the author of the Bitcoin whitepaper and was active on cypherpunk mailing lists where like-minded people discuss ways of reclaiming personal privacy in the electronic age. After publishing the original whitepaper, Satoshi continued to participate on Bitcoin forums until December 2013, and then vanished.

Satoshi Nakamoto also owns or controls a significant number of bitcoins, estimated in 2013 by cryptocurrency security consultant Sergio Lerner at 1 million bitcoins. This represents just under 5% of the total 21m bitcoins that will ever be created, if the protocol rules don’t change. If Satoshi ever moves any bitcoins thought to be associated with him, the community would immediately find out. The transactions would be visible on the blockchain and addresses thought to be associated with Satoshi Nakamoto are monitored.

Satoshi’s real-world identity matters because, if the real person or group of people were discovered, their views and voice could dominate the future of Bitcoin. However, this centralisation is what they are trying to avoid. They would also have extremely high personal security risk. It is never a good idea for people to know (or even believe) that you have significant amounts of wealth, especially in cryptocurrency.

There have been a number of high profile attempts at exposing Satoshi’s identity. These are known in the industry as ‘doxxings’: the public revelation of an internet nickname’s real-world identity. It is however highly unlikely that the real truth about Satoshi’s identity is among these doxxings.

If you decide to do some sleuthing, there are a few things to remember that people seem to have forgotten: a digital signature proves possession and use of a private key, but private keys can be shared among multiple people. So you cannot guarantee the mapping of private key to an individual. Private keys can also be lost. An email address can be shared. A whitepaper can be written collaboratively, so grammatical clues simply reveal the habits of the editor, not necessarily those of the author. It is very hard to tie the identity of an individual to the author of a paper. On the other hand, it may be better if Satoshi Nakamoto is not found.

OTC Brokers & Localbitcoins

When you buy on an exchange, you are buying from another customer of the exchange in quantities and prices agreed between you and the other customer. The exchange is only involved with the deal insofar as it acts as an escrow agent and has custody of your money and the other person’s bitcoins, until they become your bitcoins and the other person’s money. Every trade is shown to all other participants, and the order book moves in real time in response to the trading activity. One characteristic of exchange trading that a large trader may wish to avoid is that transparency. Sometimes you want to trade large amounts without other traders knowing, or without moving the market.

Enter the brokers. These are people or companies with whom you establish a relationship. Instead of showing a transparent order book of customer orders (as the exchanges do), the brokers will buy and sell directly with you, negotiating a price for the full amount that you want to transact, in what are known as ‘block trades’. Trade details are not published to the public. They are private transactions in bulk and there is nothing illegal about this - this also happens in the traditional financial markets. Legitimate brokers also apply know-your-customer processes to establish your identity and may be bound by local disclosure requirements.

When you trade with a broker, there are two modes: the broker could act as principal to the trade, or as agent. When the broker acts as principal, the deal is just between you and the broker. They are the counterparty to your trade. You tell them what you want to do (buy or sell) and in what amount, and they will tell you their best price and you can say yes or no. It is like a large wholesale trade, and the broker needs to have enough money or cryptocurrency to complete the deal. In accounting jargon, the trade is on the broker’s balance sheet because the broker itself is trading with you. This is the case, for example, when you buy foreign currencies at an exchange desk at an airport.

When the broker acts as agent, the deal is between you and someone else with whom the broker is in touch. The broker acts as an intermediary who serves to provide anonymity to both parties. In accounting jargon, this is off the broker’s balance sheet - it’s not their money, they are just matching buyers and sellers. Generally the way this works is that you contact the broker and tell them what you want to do, then the broker will try to find another customer who wants to do the opposite to you (the other side of the trade). The broker will communicate price and amount information to both sides until the deal is agreed. The broker takes a fee from one or both customers for providing this service. Due to the large amount of manual overhead and small margins, brokers usually have a minimum trade size below which, they won’t pick up the phone. This can be anything from $10,000 to $100,000 per trade and seems to be increasing as the market matures.

What if you don’t want to go to an exchange or use a broker or provide any sort of identification? There is a website, localbitcoins.com, which acts a bit like eBay for people wanting to buy and sell cryptocurrencies. People post prices at which they are willing to buy and sell bitcoins. You can browse the list to find someone nearby, and you then agree to send them money in return for bitcoins, either by meeting physically with fistfuls of banknotes, or by making bank transfers to their bank account. It is a bit like a bulletin board or eBay, and there is a reputation system with ratings and feedback comments. It also has an escrow function for the temporary custody of cryptocurrency.

Trading Bitcoins

You can now trade up to the amounts you have deposited. For example, if you have deposited USD 10,000, then you can buy up to $10,000 worth of cryptocurrency. If you have deposited 3 BTC then you can sell up to 3 BTC for fiat or other cryptocurrency that is available at that exchange. Prices are expressed in pairs that look something like this: BTC/USD or BTCUSD with a number such as 8,000. The way to read this is, ‘One unit of BTC costs 8,000 USD’. Not all currencies can be traded for each other - it is really up to the exchange as to which pairs they enable. For example you may see BTCUSD and BTCEUR as trading pairs, meaning that you can trade BTC with USD and trade BTC with EUR, but you may not trade USD with EUR directly if you don’t see EURUSD. In that case, to convert USD into EUR, you’d need to sell USD for BTC then use the BTC to buy EUR.

You will see a screen of other people’s bids and offers. These are the prices at which they are willing to trade, and how much they are willing to trade at that price. You can decide either to match their prices, which will result in a matched trade, or submit your own orders which will rest in the order book until someone matches your price (if they ever do). This is a financial market - this means that the larger amounts you want to buy or sell, the worse the prices will be. This is unlike a supermarket where you get a discount for buying in bulk. This is confusing for some people initially, but it is easily explained. When you buy something on an exchange, the exchange will naturally match you off with the person who is selling it at the cheapest price. When you’ve bought all that they have to offer, you have to find the next best price, which will be slightly higher. Selling uses the same logic: when you sell something, the exchange will match you with the person who is willing to pay the highest price for it. When you have sold as much to them as they want to buy, you will have to go to the next highest price which will be slightly lower.

Finally, you will want to withdraw fiat currency or cryptocurrency. To do so you have to instruct the exchange where you want it to go. If you are withdrawing fiat, you will need to tell the exchange your bank account details for them to make the transfer to you. If are withdrawing cryptocurrency, you need to tell the exchange your cryptocurrency address so that they can make the cryptocurrency transaction. Usually cryptocurrency withdrawals are faster for the exchange to process than fiat withdrawals because most exchanges have ‘hot wallets,’ as described earlier, which automate the process of sending small amounts of cryptocurrency back to users.

Exchanges make money by charging fees, just like your stock broker. Different exchanges charge different fees in different ways. Some charge withdrawal fees (e.g., if you withdraw $10,000, then they might send you $9,950, and you would receive even less than this because of bank fees).
Others charge by taking a small fraction of every trade you do, usually by reducing the amount of whatever you are receiving. For example, if you have $8,000 in your exchange account and use it to buy BTC at a price of $8,000 per BTC, then you will receive slightly less than 1 BTC, say 0.995
BTC. Trading fees are usually determined by how much trading you do, so if you trade more, the fee rate decreases according to a published fee schedule.

The price of any asset at a cryptocurrency exchange depends on the participants using the exchange. Different exchanges can have different prices for each cryptocurrency, because of the different participants using the exchange and the different levels of supply and demand on those exchanges. Usually the prices are within a few percent of each other. If they get too out of line, arbitrageurs step in and buy the bitcoins from the exchange where they are cheap and sell them where they are trading at a premium.

The extent to which arbitrageurs can keep doing this profitably affects how aligned the prices will ever become. To complete the circle of a successful arbitrage you need to move the fiat, and sometimes this will have costs and time delays. To buy bitcoins on the cheap exchange, you need to move fiat currency there, buy bitcoins, withdraw the bitcoins and send them to the more expensive exchange, then sell them, withdraw the fiat, and repeat the cycle. Each step has a financial cost and may not be instant. Some countries have currency controls, which hinder cross border exchange arbitrage. This is why there can be price differentials between exchanges for some time.

In late 2013-14, the exchange Mt Gox traded at a premium to its competitor Bitstamp, because people found they couldn’t withdraw fiat from Mt Gox, so instead they had to buy bitcoins and withdraw the bitcoins instead. This created artificial demand for bitcoins on Mt Gox, and the arbitrage of buying cheap bitcoins on Bitstamp and selling them on Mt Gox didn’t work because you couldn’t get your fiat out of Mt Gox. Cryptocurrency exchanges perform activities that may be regulated in their operational jurisdictions. The fact that the instruments involved are cryptocurrencies does not necessarily mean that the exchanges escape local trading and tax disclosure requirements. However, depending on how the legislation is written, and owing to regulatory uncertainty, the classification of cryptocurrencies, exchanges currently operate in a legal grey area, especially crypto-only exchanges who allow trades between cryptocurrencies but not fiat.